As startups whip up a restaurant tech frenzy, is anyone close to Toast?

Technology innovation often comes in waves, but the restaurant industry saw its surf get bigger and stronger due in part to the pandemic.

Startups stepped up across the industry to help restaurants quickly change their operations to keep up with, for many, new areas of their business, like accepting online orders, making deliveries and having to create different kinds of relationships with its customers who were now eating at home.

Toast, a financial software company focused on restaurants, has remained one of the leaders in the space. The company, founded in 2011, went public in late 2021 in an IPO that valued it at around $18 billion.

Its second-quarter earnings for 2022 confirm that place near the top: The company said its revenue grew 58% year over year to $675 million, while also narrowing its net loss to $54 million from a net loss of $135 million for the same quarter in 2021. Toast also said it is on track to generate revenues of $2.6 billion this year.

“Toast had another great quarter, sustaining our operating momentum with a record number of net new locations and strong revenue growth, both of which highlight the power of our industry-leading digital platform for restaurants.” Toast CEO Chris Comparato said in a release. “With restaurants operating in a challenging environment, the benefits that Toast’s platform provides our customers are even more important, and true to our mission we are focused on helping restaurants adapt and thrive.”

With the global restaurant management software market size forecasted to reach $14.7 billion by 2030, it got me thinking about who might be next to perhaps, ahem, toast some of that market growth? Among the hundreds of startups receiving funding, are there some standouts in the next wave of restaurant technology?

I brought that question to Stephen Sheldon, a vertical technology analyst at William Blair who follows both Toast and competitor Olo, and Alex Taussig, a partner at Lightspeed Venture Partners who provided some insights on where the restaurant tech scene was headed.

The environment

Both Sheldon and Taussig said that the restaurant tech market is so big that there are still myriad opportunities for startups to pursue.

Food remains “one of the biggest, most recession-proof markets there is,” with about half of food being consumed out-of-home, Taussig said. With a market that big, a startup doing point-of-sale software and charging some software-as-a-service fees could very easily become a billion-dollar business, he added.

Sheldon, citing one of his analysis reports on restaurant and hospitality technology, said that restaurant revenue was likely to top $1 trillion over the next decade.

In fact, Sheldon pointed out that people “under-appreciate” how big the market could be — his research shows there are between 800,000 and 900,000 restaurant locations just in the United States alone. And the landscape is fragmented, “even for Toast” he said. “They’ve done an incredible job going from 4% penetration two years ago to 8%,” he said. “With all of the growth they put up from a location perspective, it’s still less than 10% penetrated in this large market.”

Tech spend

Sheldon expects technology spend, in terms of software, will “trend a lot higher” in the coming years. One of the big data points he feels makes that argument is the percentage of industry revenue that is spent on tech. Averaging many industries together, spend comes to an average of 8% of top line. Pulling out retail and e-commerce, technology spend drops 6%. But when you look at restaurants, it is still below 3%, he said.

The analyst attributes much of that to the complexity of integrating technology and the fact that the restaurant industry largely relies on human capital. Therefore, many investments in technology are led more by “gut decisions versus the use of data and analytics” to determine how to price different menu items, what items to have on the menu and how to figure out what to price a dish when the cost of an ingredient suddenly doubles. And to do all of that immediately — not waiting a month or two to continue selling something that has negative unit economics, Sheldon added.

“We’re in the very early stages of an inflection point,” he said. “As we think about the next three to five years, and given the pain points that restaurants are seeing, restaurant spend on technology as a percentage of revenue could probably close the gap of retail pretty quickly.”

Is anyone close to Toast?

From the conversation with Sheldon and Taussig, it seems like Toast has carved out a section of the restaurant industry for itself as a comprehensive solution for restaurant payments.

Neither wanted to play favorites and say who might be next, so instead, let’s take a look at investments into the larger restaurant tech space to see who is getting big today.

A Crunchbase analysis of restaurant tech earlier this year found investment figures of $2.3 billion for all of 2021, up from $800 million four years prior. A list of over 860 global restaurant startups put together by the organization shows that the amount of capital raised by startups in the space in 2022 is already eclipsing 2021 totals.

Among the group are a lot of food delivery companies. One is iFood, which one might say has already reached “Toast level” based on its growth. The Brazilian food ordering and delivery platform raised around $600 million, per PitchBook, and Just Eat Takeaway recently sold its stake in the company to Prosus.

Another in the same space is Wonder, which secured $350 million earlier this summer to give it close to $900 million in equity and debt investment. This company, led by Marc Lore, has grown in a relatively short time: Since its launch early this year, it created 19 mobile restaurants and is available in 22 towns in New Jersey servicing more than 130,000 households.

It’s also worth throwing Choco in the mix. The company developed a digital platform to connect restaurants with their supplier to optimize the food supply chain and cut down on waste. Choco is now valued at over $1 billion after raising $111 million in a Series B2 round earlier this year.

Standing out

Another thing both Sheldon and Taussig agreed on is that even as big as the market is, it remains fragmented and ripe for consolidation.

Sheldon believes a lot of startups are “doing a good job carving out niches for themselves,” for example, going after only pizza restaurants or quick-service drive-thru technology. However, the more end-to-end they can be, similar to Toast, and the more pain points they can solve for the restaurant, the better the outcome may be.

To that point, Toast also stands out in the way it was able to verticalize the point of sale, Taussig said.

“While people were very skeptical they’d be able to execute that given how fragmented the space was, they kind of took the ball and ran with it because no one else had really done that,” he added. “They also executed an incredible sales playbook, which still today feels best-in-class. It was a combination of optimizing on the vertical, building products specifically for restaurants, and then just incredibly strong sales execution that allowed them to get the share they have.”

For startups that can’t do that yet, Taussig said there are other ways to get a piece of the pie. A few were mentioned above but also by focusing on reservations, payments, menus and delivery.

Another avenue is bringing technology into a space that is still very “clunky” and dominated by a handful of legacy companies — for example, food-service distribution.

“There are digital disruptors coming in now that are trying to find a wedge into that ecosystem,” Taussig added. “Some of them are trying through messaging, for example, how a restaurant orders from the distributors. Digitizing the flow of information and capturing some of it. The key will be how they show there is a decent amount of value they create for their markup. If you’re going to wedge yourself into that market, you can’t really displace them, but a lot of these companies are kind of trying to figure out.”